Top 10 Compensation Mistakes Made by Small Businesses

Why Failure to Motivate Your Employees Will Drive Them to Leave

What We’ve Seen

Small businesses frequently fall into the trap of treating compensation programs as “something to worry about when we get bigger.” The fact is, small organizations need to attract, retain and motivate employees, and compensation is a critical piece of total rewards. Small organizations commonly make compensation mistakes that affect business performance and growth. Following are the top 10 mistakes small organizations make in their compensation programs.

10. Shhh! Telling Managers and Employees Not to Talk About Pay

Keeping pay discussions and compensation levels discreet makes HR’s job easier and does away with many difficult discussions related to pay. While this practice was successful a few decades ago, in today’s world employees share everything. These days, employees not only share their salary amounts with co-workers, but they post salary amounts on social networking sites and even dating sites. Rather than asking employees and managers to do the impossible and keep salaries secret, expect that this will happen and be certain to clean up all the good, bad and ugly secrets that could be revealed.

9. Adjusting Pay Structures Without Looking at Pay Levels for Each Job

Many small employers assume the market moves in lock-step, with salary levels for all jobs always changing at the same rate. They believe if they just move their pay structures each year their pay plan will be fine. However, pay moves differently for different positions. Over a three-year period, these variances compound, and they can run as high as 12 percent to 20 percent. Employers then are faced with making a large and expensive correction to their pay plan. Make sure you look at actual market data for all positions at least every other year.

8. Living by Exception. Creating and Enabling Internal Inequity

Just because an organization is small doesn’t mean it can’t put proper compensation policies and philosophies into place. The trap many small organizations fall into is dealing with each employee as an individual and focusing on the person, not the role. Over time, the company will find itself struggling with internal inequity issues. We know employees are sharing salary information, and that means internal inequity situations inevitably will bubble up. When every salary decision is treated as an exception, it can cause widespread employee dissatisfaction.

7. Doing It Alone

It isn’t uncommon that the person in charge of compensation at a small organization has fallen into the role as the organization has grown. At very small organizations (less than 25 employees), many times the office manager or bookkeeper is tasked with executing the CEO’s compensation decisions. Just as you hire tax advisors, rather than expecting the CFO to be an expert in all areas, compensation is a sub-specialty within HR. An HR generalist won’t be a specialist in every aspect of HR, and reaching out to a consultant is a great way to complete a project. The right consultant won’t just complete the project, but will train HR staff along the way, so it’s easy to maintain any programs put into place.

6. Not Using the Proper Tools and Assuming You Are Paying at Market

A wealth of data and technology is available to HR departments to help research, develop and execute compensation programs. HR professionals at smaller organizations often don’t look into such tools, because they assume robust solutions come with robust pricing, and budgets for HR effectiveness software are typically thin. While there are very large solutions for very large organizations, smaller organizations shouldn’t assume small-company versions of software and data packages are not available. Many times, all you have to do is ask.

5. Being Cheap

Small organizations pay differently, but how differently? Knowing small organizations pay differently doesn’t mean it is okay to be cheap. Finding the right salary data to represent an organization’s relative recruiting market is key to attracting and retaining talent. Salary survey data is only useful if it represents an organization’s relative recruiting market—that is, it represents organizations from which the company recruits talent, or organizations the company loses talent to. Data sliced for this industry, size and location will help the organization position itself for success. Good survey data is expensive, but bad survey data is more expensive. Most businesses’ biggest expense is labor costs. Look at the relative cost of a $1,000 salary survey: If you calculate the percentage of that cost relative to your annual labor cost expenses, you will see what a wise investment good survey data is.

4. Diva Syndrome

Small organizations frequently encompass newer businesses and technologies, which naturally draw owners and staff with big egos, who misplace the importance of their organizations. Looking for comparable salary data for a specialized organization is nearly impossible, but that doesn’t mean there isn’t comparable market data (see relevant recruiting market). Chances are, the organization is recruiting talent from organizations in broader industries, not the same niche industry. Yes, your organization is special and different, but how you pay people isn’t.

3. Thinking Small—Not Understanding the Competition

Small employers often believe they are competing for staff against the same organizations with which they compete for clients. While this may be true for some positions, it is rarely that simple. Employers typically compete with both small and large organizations for staff. Most jobs have transferable skills that allow the incumbent to move into a job in different industry. A great work environment or a convenient location can allow for slightly lower base pay rates, but the pay must be relatively competitive within the larger labor market to attract and retain employees.

2. Assuming a 3% Merit Budget is Too Small to Use for Differential Pay

Believe it or not, a 3% merit budget is adequate for making meaningful increases. However, this means you must make difficult decisions and initiate difficult conversations related to pay. Your superstars will receive considerable increases, while some employees will not receive an increase. This is the way to achieve true pay for performance.

Taking the peanut butter approach, in other words giving a 3 percent increase to everyone, is the easy way out. Managers frequently take this approach to avoid difficult conversations with employees. It’s better to give merit increases for rewardable behaviors and performance, not for doing only what’s required to get the job done. Think of it this way: If one of your two children does all her chores, would you give both the same allowance?

1. Communication, Communication, Communication: Not Teaching Managers and Employees How the System Works

Employees and managers need to understand your pay system fully. Employees want to hear about pay issues from their managers, not from HR. Managers who don’t understand the system have a very difficult time holding pay discussions with those who report directly to them. When managers and employees need to discuss this sensitive issue, the discussions will be more successful if you have explained the basics of the plan to employees and shared details with managers. You can’t provide training or communication about a plan that exists only in the CEO’s head.

Many organizations go through the process of conducting a market analysis and assessing the pay placement of staff, but neglect to tell all employees the work was performed. Without information, employees assume no one is paying attention to their pay, and are more likely to go searching for data on the Internet or to shop their résumé. Research shows good communication about pay programs increases employee satisfaction without increasing costs. Take credit for the time and energy you put into your pay plan. Tell your staff about it.

Small businesses compete for talent every day, and appropriate pay levels are one of the top reasons individuals join organizations. Make sure your pay plan supports your business objectives. The small businesses of today are the large businesses of tomorrow. Avoid compensation traps common to small business HR departments, and you will attract, retain and motivate the talent that is critical for growing your business successfully.

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